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Discretionary Trusts

24.A37. Discretionary trusts require further consideration. (‘Discretionary trust’ refers to a trust under which the trustee or some other person has a discretion as to how the trust income is to be distributed among persons entitled to be considered.) If

  • (a) a person is entitled to be considered in the exercise by another person of a discretion in relation to the distribution of income of a trust estate, and
  • (b) that entitlement ceases for any reason whatsoever (for example, the expiration of a term of years, the assignment of any future entitlement, the exercise of a discretion in relation to corpus or the death of the person entitled), and
  • (c) the person so entitled has received income as a result of the exercise of the discretion during a specified period of years (N years) preceding the date on which the entitlement ceases,

he should be deemed to have disposed of a fraction of the assets of the discretionary trust, such fraction being: (income received by that person over the N years) ÷ (total income of the discretionary trust during this period). The choice of an appropriate figure for N poses some difficulties. On the one hand, if N is small, say 5, one may expect that elderly beneficiaries will be phased out of income distributions as they advance in years, thus significantly reducing the fraction. But if the figure for N is large, there will be other problems. For example, if N is set at 50 and one person has received all the income from the estate during the last 20 years but little or nothing during the earlier 30 years, then only two-fifths of the assets would be brought to tax on the cessation or assignment of the interest. Conversely, it would seem somewhat unfair to tax the person who received the income during the earlier 30 years on a basis that would bring three-fifths of the value of the assets to tax at a date 20 years after he received the last benefit from the estate. In addition, a large figure for N will create


  ― 463 ―
administrative difficulties for the trustee and the Revenue. On balance, a smaller figure for N seems preferable, though it has to be recognised that this may encourage the establishment of discretionary trusts. The Committee suggests that a period of ten years be adopted; if the trust subsists for a lesser number of years, N should be equal to that number. For the purpose of determining the total income of the discretionary trust, concepts of trust law rather than income tax law should be employed and any applications from corpus should be deemed to be income to the extent that there is accumulated undistributed income in the trust.

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